Indonesia Telco: Pricing is not up in 2Q18, but healthier trends observed vs. 1Q18

We conducted an on-the-ground review of telco tariffs across: 1) traditional channels, and 2) distributors. Our key takeaways are: a) data yields remained down in June vs. May but this is likely due to telco channel stuffing, with June Lebaran actual demand strong especially in rural areas, b) Strong demand is prompting telcos and distributors to raise their ASPs in July, c) starter packs are incrementally deemphasized (vs. reloads) at Telkomsel. Our thesis of a better recovery in 2H18 is starting to take shape; hence, we see 2Q18 as another “wash-out” quarter due to a ‘lost’, subscriber base (see our report “Indo Telco – The State of Play: 1Q18 Wrap up” , 16 May 2018).

All in all, this suggests 2 key findings: a) 2Q18 revenue probably has yet to recover owing to continued data-yield pressure, while subscriber overhang remains due to SIM card deregistration, b) however, the overall trend is definitely getting healthier, especially with market leader Telkomsel since late June deemphasizing high-churn starter packs. This suggests its focus has turned towards lower-churn customers, which is positive for the longer-term tariff trend (ie, it is easier to maintain tariffs in an ecosystem of recharges vs. one of starter packs), and paves the way for trend improvements in 2H18.

Data yield down from average of IDR8k/GB to average of IDR6k/GB in June; but demand was strong during Lebaran. Our research across traditional shops in Jakarta, Jogja, Bandung and Makassar (700+ data points in 3 months) suggests data yields continue to trend lower across different absolute price ranges. Our market research looked at 3 price points i) below IDR25k, ii) IDR25-70k, and iii) above IDR70k. Our key findings are as follows:

1) Data yield overall declined for Telkomsel, EXCL and Fren, while for ISAT, Axis and Tri it is stabilizing-to-rising. In 1Q18 we observe data yields falling sharply to IDR8-10/MB (4Q17: IDR9-14/MB); in 2Q18 our market research suggests a further decline potentially to IDR6-8/MB on a blended basis. A data yield decline is, in our view, natural and we also understand demand (consumption) during Lebaran was especially strong for telco packages, which offsets data the yield decline. Our official view is that tariffs will continue to decline, but at a less rapid pace, which bodes well vs. the 2H17-1H18 rapid-declining tariff season.

2) SmartFren data yield gap significant vs. others. Fren data yield ranges from IDR4k-5.5k/GB or a good 10-20% gap vs. others. Smartfren is the only player we see turning more aggressive in July; we think this is a logical move given Fren’s sparse network and see this is one factor limiting tariff upside continuously. Our meeting with Smartfren suggests they have a peak utilization below 50% (lowest in the sector); indeed the recent OpenSignal June Indonesia report ranks Smartfren’s 4G availability and overall download speed to be the fastest, even above Telkomsel’s. We believe Smartfren’s network does put a cap on overall tariff increases (see next section for more thoughts on Smartfren).

3) Telkomsel likely exited low-priced packages (below IDR25k) in July. This tallies with our market research and we understand it is management’s strategy to shift towards reloads and less churn. We believe this is healthy for the industry, and with the exception of Smartfren, we are indeed seeing less competition in this segment.

Indonesian Telecommunications Regulatory Authority (BRTI) has announced that the upcoming spectrum auction of 2 x 5MHz (2.1GHz band) and 1 x 30MHz (2.3GHz band) will be held in October. Our previous channel check with BRTI officials suggests that the 2.1Ghz band was transacted at about USD40m per 5MHz at the previous auction. Assuming that the price does not change, this implies that the 5MHz and 30MHz blocks would account for approximately 3%/10%/10% and 10%/50%/50% of Telkom, XL and Indosat’s FY17F capex respectively. PT Telkom and XL may bid for both blocks, while Indosat would only bid for one block. A likely scenario of the auction results may be Telkom winning one block, while the remaining block would be won by either XL or Indosat.

Telkom and XL Axiata (XL) have the highest data traffic/spectrum owned and financial muscle. Representatives from Telkom and XL have both indicated that the companies are willing to bid for both blocks, while Indosat would only bid for one block. This is understandable – as Telkom has the biggest balance sheet, its data traffic/spectrum is also the highest in Indonesia. This is followed by XL and Indosat. In terms of flexibility to bid for the blocks, according to their net gearing levels, the descending order would be as follows: Telkom (0.14x), XL (0.6x) and Indosat (1.5x). We also believe Indosat would be the least flexible player, as it may be pressured to raise capex to build base transceiver stations (BTS). It currently has the least BTS, among the top three telco operators. (Norman Choong, CFA)

- Inorganic and organic growth to maintain biggest tower status: At this stage, we are of the view that Sarana Menara Nusantara ($TOWR) will maintain its status as Indonesia’s biggest tower operator through both organic and inorganic growth. Currently, TOWR has 24,209 tenants and 14,529 towers (collocation rate 1.67x), slightly higher than its closest peer TBIG with 21,562 tenants and 13,463 towers (collocation: 1.60x). In 9M16, TOWR’s number of towers jumped 19.0% y-y versus TBIG’s growth of 9.5% y-y, helped by the acquisition of 2,500 towers from $EXCL.

- Strengthening debt structure: TOWR has managed to lower its exposure to foreign currency debt from 59% to 45% (3Q16) and added a greater proportion of IDR debt through its latest bond issuance of IDR800bn (with tenor of 3.5 and 7 years) on 9 November 2016. We believe this will make TOWR’s cost structure more prudent given lower FX risks, although average interest rates jumped from 4.88% in 3Q15 to 6.53% in 3Q16, due to EUR55m and USD190m in debt repayments.

- Support from operators’ data growth: Data growth of the 3 big operators have continued to accelerate, up 124% y-y in 3Q16 (2Q16: +99% y-y, 1Q16 +84% y-y), providing higher demand for TOWR. On the back of higher data usage (exhibit 8), which requires increased Base Transceiver Stations (BTS), we expect TOWR’s number of tenants to rise from 25,548 in 2016F to 26,568 in 2017F.

Outlook: Bad news mostly in the price
TOWR has severely underperformed the market by more than 40% in the past 12 months (exhibit 4) on less favorable industry outlook as large players such as $ISAT and $EXCL decided to share their capex, causing slower growth outlook. Additionally, we believe $TLKM will focus on its own internal tower projects. That said, we believe most of the bad news has been priced in, although there is still no signs of the operators selling their towers this year.

Recommendation: Reiterate BUY with unchanged TP of IDR5,600
On valuation, we apply a WACC of 9.2% to obtain our DCF-based 12-month TP of IDR5,600, reflecting 60% upside potential. At our TP, TOWR would trade at 13.0x 2017F EV/EBITDA, still at a c.20% discount to the current global average of 16.8x (exhibit 5). Risks to our call would be greater-than-expected competition and slower organic as well as inorganic growth.

Telekomunikasi Indonesia ($TLKM) is planning to expand its submarine-cable network across the country to support international connectivity. Bastian Sembiring, Vice President Wholesale and International Network Services of TLKM, stated that the submarine cable investment requires IDR600m per km and recently TLKM has owned 10 international submarine cable networks, of which all investment sources were own funding. (Kontan)

¨Outflows dominate.Worries over a potential US Federal Reserve (Fed) rate increase and weakening IDR have triggered outflows in both the equities and fixed income markets. This is a reversal after months of inflows. Post Donald Trump’s win in the recent US elections, the JCI continues to trade at sub-5,200 level, with outflows recorded at IDR9.6tnin November. Similarly, outflows in the fixed income market have deepened, reaching IDR17trn over the past month, with the 10-year government bond continuing to escalate to 8.3% (August: +6.3%). Arguably, a lack of catalysts in the market have also led to the insipid performances, and we are only expecting stronger market direction post the Fed rate increase that is expected by mid-December.

¨The three spectres arecurrency, interest rate trends and politics. As highlighted in our 14 Nov 2016Currency Woes Dampen Sentimentreport, the fundamentals still point towards a resilient IDR. This is underpinned by its high-yield differential vs developed market (DM) economies and peers, relatively high levels of growth among major emerging market (EM) economies, and ongoing reforms. Rising current account deficit (CAD) over the next few years is still manageable, while forex reserve levels also improved to USD115bn.

¨Action by Bank Indonesia (BI)to intervene in the currency market is plausible to indicate direction. An influx of asset repatriation is also expected towards year-end, which would help the IDR to recuperate to a more favourable level. We opine that BI would maintain its current relaxation bias policy to propel economic growth, especially given the subdued inflationary outlook. As the series of rate cuts have yet to result in a meaningful economic trajectory, it is unlikely that the central bank would take the risk by reversing its current relaxation policy.

¨ Over the past five years, the spread between the BI rate and inflation has averaged 130bps vs the current 145bps spread. This provides room for further relaxation if needed. We expect BI to maintain its current benchmark rate until year-end, and potentially make another 25bps cut in early 2017 to further support economic growth under stable IDR circumstances.

¨ Jakarta Governor Basuki Tjahaja Purnama’s alleged religious defamation has raised the political landscape’s temperature, as seen by the magnitude of the anti-Basuki rally that occurred earlier this month. This upheaval is negatively perceived by investors, especially after >2 years of stable politics. The market is likely to take heed of the next rally and, more importantly, how the Government handles the situation. So far, the security forces have been exemplary in restoring stability. We continue to believe that the Government’s position remains strong. As long as these forces remain united under presidential control, any act that destabilises the country can be brought under control quickly.

Ministry of SOEs hopes the revision of network sharing regulation will be fair for all operators. Ministry of SOEs Rini Soemarno said that the revision of network sharing regulation in Gov’t regulation No 52/2000 should consider the investments that have been spent by Telkom ($TLKM). Rini said that the gov’t should calculate all the risks and benefits on the revision so that it will not hurt operators that have invested in the network development for years.

Comment: Considering that the network sharing regulation proposal makes it optional to share, not mandatory, Telkomsel would have the option to share its equipment if it wants to monetize the investments it made. But at the same time, it also does not force Telkomsel to share, if Telkomsel feel the risk from competition is greater than the potential increase in lease rates.

$TLKM – Telkom officially launched its 3rd data center service “Telin-3” in Singapore.Telin Singapore CEO Septika Widyasrini said that Telin-3 is a carrier-neutral data center supplier that is connected to domestic fiber optic network owned by Telin Singapore. Telkom also owned 2 data centers (Telin 1 and 2) which are located in Changi and Tai Seng, Singapore.

Comment: Building a data center in SG helps Telkom reduce traffic that goes to the U.S. by caching regularly downloaded data to the data center in SG. A data center in SG may also attract companies to setup mirror site in the region but are not as comfortable to setup such sites in Indonesia.

Sharp correction in JCI (down 4% on Friday) was mainly triggered by precipitous IDR weakening on external factors, while domestic macro improvements remain on track. We believe fundamentals still point to a resilient IDR, especially given Indonesia’s relatively high levels of growth among major EM economies. Consumer, pharmaceutical, poultry and high-end retailers would be at risk of IDR weakening, while commodities and heavy equipment players tend to benefit. High dividend yield stocks also offer protection in the current volatile market. Maintain LT positive view.

¨ Currency volatility is back on. Fears over potential Federal Reserve (Fed) rate hike resulted in IDR falling by up to 3% to IDR13,545/USD onFriday. Considerable IDR weakening could lead to higher production costs and potential cost overruns in certain infrastructure projects, which would lead to higher inflation and growth risks. Strong foreign fund inflows have also increased risks.

¨ Indonesia is still on track for macro improvement, in our view particularly with its rising forex reserve of USD115bn and potential influx of repatriated funds by end-2016. However, the weakening IDR is seen as the main spectre for investors and its occurrence could trigger a market melt-down due to panic selling, shifting focus away from real fundamentals. Thus, BI’s firm response and action would be critical in restoring stability and confidence, in our view. We opine that IDR volatility would still linger before it recovers to IDR13,200/USD by end-2016.

¨ Stronger fundamentals now. There have been several episodes of high IDR volatility, with the last one occurring during 2014-15, when IDR depreciated as much as 30% and JCI suffered 13% losses. In our view, the current situation is different especially given the positive macro environment, in contrast to the subdued economic situation during 2014-15,on BI’s tightening rate policy bias.

¨ BI is already in the market to stabilise the currency given considerable depreciation in IDR, and we view this intervention as plausible to show direction. Current account deficit also remains manageable at 2.1% in 9M16 (3Q16: 1.8%) vs peak of 4.3% in 2014.We expect IDR to weaken slightly to 13,600/USD by 3Q17 on the back of larger current account deficit and potential Fed rate hike.

¨ Resilient IDR. In summary, we opine that fundamentals point to a resilient IDR, underpinned by high yield differentials vs developed market (DM) economies and peers, relatively high levels of growth among major emerging market (EM) economies, and ongoing reforms. Domestic consumption and government-led infrastructure spending also continue to serve as supporting factors for economic growth improvements and we still expect the economy to grow at 5.3% in 2017.

¨ Impact of weakening IDR. IDR weakening would impact corporate earnings through operational currency mismatch and/or forex debt translation. Consumer, pharmaceutical, poultry and high-end retailers have high importation costs and would be at risk. Conversely, exporters such as commodities and heavy equipment players would tend to benefit. Companies with high USD debt would also be negatively impacted if IDR weakening continues.

JCI went into considerable correction, down as much as 2.4% during the intraday, following the prospect of Trump’s winning. Selling pressure were visible across sector, with IDR also depreciated 0.9%. Closer to end of trading hour, market slightly improved mainly led by a rebound on commodity counters, with index closed down 1% with IDR relatively flat.

The Trump’s winning undoubtedly creates uncertainty, especially on the execution and direction of what would be the policy under his administrative, on both economy and politic. According to our economist, historical facts imply that a clean sweep tends to be more positive for the US economy in general because of less gridlock. As such, with Republican sweep (Trump President and GOP Congress), fiscal policy, both from higher spending and lower taxes, is likely to be more expansionary over the next four years on average. It is still too early to conclude for any potential downward revision on economic growth at this stage.

One of the main concerns of the Trump administration would be on potential trade protectionist (anti-trade) issue. In regards of Indonesia, the main export products to the US would be textile, rubber product, shoes, electronics and F&B with export to US accounts for 12% of total non oil and gas export. However, the impact the share of export to GDP in Indonesia remains the lowest in the region at 22% (Vs Thailand’s 58%, Malaysia 73% and Singapore 198%), which would provide much-needed shelter under global economy volatility circumstances. Domestic consumption and government-led infrastructure spending continue to serve as the underpinning factors for economic growth improvement and we still expect economy growth at 5.3% in 2017.

Our economist still expect that the Fed is likely to go ahead with its tightening policy bias and raise rate by 25 bps this December. As such, one of the palpable risks would be on currency of which IDR has enjoyed 5% appreciation ytd. Any sudden increase in volatility could risk of escalation of importation of raw material and potential cost overrun in certain infra projects, which undoubtedly will led to inflation and growth risk. In our view, this risk would be contained, especially as: 1. Indonesia rising forex reserve of USD115b and expected to reach USD150b by 2017; 2. Repatriation fund inflow by end of the year; and 3. Record low inflation outlook at sub-4% level.

Acknowledging potential change in global trade and politics, Indonesia with its domestic consumption at the core, remains to offer attractive investment thesis. At this stage, we see no change on Indonesia fundamental investment story, and maintain our constructive view mainly underpin by macro improvement and government-led infrastructure investment. Our top picks in the market mainly comprise of company with strong balance and visible earnings growth and they are: $BBNI, $CTRA, $BSDE, $TLKM, $INDF and $WSKT. To play on the positive rally on the commodity, we like LSIP and UNTR. (Helmy Kristanto)

¨ Scope for higher data growth. Telkomsel’s below average smartphone penetration of 47% in 3Q16 (average pulled up by XL which has 60% of its subscribers on smartphone as at 3Q16) reflects the profile of its base which comprised largely of silver hair users and the Java concentration of its rivals. We see strong data growth opportunities going forward with the gap progressively narrowed, supported by its superior network.

¨ IC rates decision soon. Management expects a decision on the interconnect (IC) rates by the Indonesia Telecoms Regulatory Body soon. To recap, the new IC framework was initially slated for implementation in August but pushed back pending a further review. While the regulatory environment looks to be less favourable for Telekomunikasi Indonesia (Telkom)/Telkomsel (allowing peers to further encroach into its non-Java stronghold), management said the impact from the change in the IC rate would be minimal (IC revenue makes up only about 1% of group revenue) with 90% of its traffic ex-Java being on-net.

¨ IndiHome realignment. Telkom expects its IndiHome (triple play service) customer base to double-up in FY17 from 1.5m in 3Q16 with the focus on the more profitable subscribers. A deliberate attempt to remove low-paying subscribers led to higher churn in 3Q16. However, its ARPU improved sequentially to IDR313,000 from 2Q16’s IDR300,000.

While demonstration arguably has became part of life in Jakarta, last Friday’s demonstration would be one of the largest, reported to gather c. 50,000 people. The action were joined by many Moslem organisations from several regions to protest against Basuki T. Purnama (Ahok) on the allegation of religious defamation. The demonstration was mostly running in peace and calm order, but suddenly escalate into chaos at c.6 pm, the cut off time limit given by police. Couple of police trucks were burned with several casualty was reported on both side. The chaos only occurred in two specific locations, outside the Presidential Palace and one location in North Jakarta, with one Indomaret convenience store was looted. On Sunday, the police mentioned that the perpetrators of chaos in North Jakarta were unrelated to the one in Presidential Palace, and appears to be purely criminal act.

3 key messages from President Jokowi

We were encouraged by the way of the police and army to act quickly to restore the stability with tear gas, water cannon and truncheons, with strict order that rubber bullet was not allowed to be used. The situation was mostly under control past midnight.

Presiden Jokowi held press conference on early Saturday, with 3 key messages: 1. He condemned the chaos and violent demonstration;2. The legal process of Jakarta governor alleged transgressions would be concluded quickly and transparently and 3. Political actors are believed to ride on yesterday's chaos. In our view, the third points would signify escalation of political tension, which would led the government to make stronger intelligence effort and beef up security to prevent the whole situation to heighten. President Jokowi has also delayed his trip to Australia (scheduled: 6-8 Nov) to focus in restoring domestic stability.

Negative pressure is expected but macro improvement is still on tract

JCI has priced in a peaceful rally on Friday, with index closed up +0.6% ( +1.1% from Friday's low). Selling pressure is expected to happen on Monday, especially on the potential higher volatility of IDR.

There is also growing concern in relation to the prospect of asset repatriation under the current tax amnesty scheme. While the repatriation has been reported to the tax office, the physical transfer of that assets are still underway, with deadline by end of December. As such, it is imperative for the government to act quickly to restore confidence.

- +9% gains in MSCI Indonesia since our country upgrade in July - Since our upgrade of Indonesian equities to overweight two months ago in the MIG publication after clarity on its tax amnesty programme emerged, sentiment has further improved following the appointment of well respected Finance Minister Sri Mulyani Indrawati. The Indonesian equity market has seen strong equity inflows in 3Q16 lifting the index up ~9% (local currency terms, +8.2% in USD), which has outpaced world equities’ gains (+5.2%) for the same period and supported our call.

- Year to date’s gains of +18.6% has also more than recouped 2015’s losses of -12%, which has supported the turnaround highlighted in our January 2016’s South East Asia Equity Strategy report. The equity market rally year to date has been supported by a benign environment of lower interest rates, stable IDR currency vs the USD, under-owned positions in global portfolios and improving confidence in Indonesia’s recovery story. Estimated equity inflows into Indonesia so far for 3Q has exceeded the total inflows for 1H16, driving the market to new highs. Since mid May this year, it is estimated that net equity inflows reached $1.7bln, vs $1.6bln net outflows over the whole of 2015 (source: JPM estimates).

- Near term positives post amnesty and cabinet reshuffle look priced in, valuations are now close to 10 year high – At 16x PER, Indonesian equities is now trading close to +2 standard deviations to its 10 year historical average multiple and at its highest valuation level since 2007, which we believe has priced in much of the near term positives. Although near term liquidity is likely to remain supportive given benign expectations on interest rates, we caution that valuations have caught up and believe it is prudent to start taking some money off the table. On domestic updates, while the recently released 2017 budget is credible, it is unlikely to lead to further corporate earnings upgrades given a moderate government spending target of 6% (planned fiscal deficit for 2017 is 2.4% of GDP, flat/lower than 2016E). Towards the end of September and December which marks the first and second phases of the tax amnesty programme’s staggered tax rates for declared wealth, investor sentiment may also be influenced by expectations over the tax collections.

- Muted start to the 9-month tax amnesty programme, although still early days - As of 23rd August 2016, the asset declaration in the Tax Amnesty Program has reached Rp51.7tn, consisting of 85% onshore/15% offshore assets (12% overseas assets declared, 3% overseas net assets repatriated), while asset repatriation has reached Rp1.6 tn. Momentum of onshore assets declared in first half of August has picked up, with the tax office reporting about Rp11.5tn worth of onshore assets declared (>4x July’s). About three-quarters of the assets declared were from private individuals, and the balance private entities, which we view as supportive of property sector’s recovery given interest rates are expected to remain low while the Ministry of Finance has allowed repatriated funds to be invested in real assets (such as property and gold).

- Looking ahead, earnings upgrades need to pick up momentum for the rally to have more legs - Earnings wise, the recent 2Q results season was mixed with single digit corporate top line growth from a year ago. Concerns on banks remain dragged by asset quality issues while commodity related earnings have been moderate. Following the latest 2Q earnings season (where consensus earnings were trimmed -2% lower for FY16E and FY17E), FY16E and FY17E earnings are now forecast to grow +7% and +14% respectively (higher than Asia ex Japan equities’ 2.2% FY16E and 11% for FY17E respectively) which we believe is priced in current valuations.

Time to lock in some profits – Switch out of names which have rallied and offer no upside to target prices- Sectors we are cautious on are: Commodity related plays which have rallied and priced in recovery expectations (coal – Bukit Asam, ITMG, palm oil – Astra Agro, London Sumatra), Banks (loans growth will be moderate while we expect asset quality concerns to remain a near term overhang) and Utilities (in particular, Perusahaan Gas – where we think profitability will remain pressured by regulatory efforts to lower gas prices).

Preferred Picks/Switch Ideas

- Preferred Sectors we would accumulate new positions are: Property (Bumi Serpong – Western Jakarta play, large landbank catering to middle income buyers), Telecommunications (Telekomunikasi Indonesia – improving smartphone penetration and data usage supported by a young population), Consumer (Indofood and Media Nusantara, which benefit from an improving domestic economy in 2H16) and Infrastructure (Jasa Marga – No. 1 toll road operator, long term beneficiary of infrastructure development in Indonesia).

- Risks to the current rally include weaker than expected global economy, faster than expected Federal Reserve interest rate hikes which may result in global liquidity volatility and disappointments in the domestic recovery and infrastructure spending pace (continues to be a focus in the 2017 budget, with 9% yoy expected growth).

The continuing risk-off sentiment post Brexit is generally supportive of yield-oriented telco markets. Since the 24 Jun referendum, SG Telcos – which are the most predisposed to the dividend theme – have re-rated by 11-13% (MY Telcos: +2-3%, TH Telcos: +2-6%). Assuming a further 50bps compression in yields, we estimate an added 10-13% upside for SG Telcos (MY/TH Telcos: +9-16%). Telcos with the greatest upside across the ASEAN-4 are M1, AIS and Singtel on a renewed yield compression theme. Our regional telco Top Picks: Telkom Indonesia, M1, AIS and Time dotCom.

¨ Re-dialling the yield theme post Brexit. Telco stocks have garnered renewed interest following the unprecedented Brexit outcome and the US federal fund futures market pricing in zero probability of a rate hike for the year (the US Federal Reserve has kept interest rate unchanged at its June meeting). The re-rating bears some resemblance to the yield compression theme that swept across emerging/developed market telcos at the height of the US quantitative easing (QE) programme in 2010-2013 against the backdrop of low interest rates (see our 25 Aug 2015 sector report: Telecommunications : Staying Connected – Aug 2015). With the continuing risk-off sentiment globally, we expect markets/investors to remain supportive of yield-related telcos as haven assets.

¨ SG Telcos score highly on yields. The SG Telco market is the most predisposed to the yield compression theme of the ASEAN-4, with the telcos’ superior dividend yields of 5-6% and larger yield spreads of 2.8% (5-year mean). This compares with MY/TH Telcos’ dividend yields of 3-5%/4-6% and yield spreads of 0.7%/2.1% respectively. Singapore/Malaysia/Thailand bond yields have narrowed by 24bps/25bps/17bps respectively since the Brexit vote and are likely to compress further in the current environments. M1, Advanced Info Service (AIS) and Singtel have the greatest exposure to the yield compression theme, with yield spreads above their long-term means.

¨ Competitive risks are top most concerns in three of the four ASEAN-4 markets. We continue to see competition as key risks for the telco sector in Malaysia, Singapore and Thailand, given the combination of spectrum award/reallocations, potential new entrants and challenges monetising data (pressure on data yields). The telecom regulators in Malaysia and Singapore are in the process of re-farming existing spectrum (via auctions or direct assignments), which will further level the playing field and/or attract new operators. All three telco markets have witnessed marked deceleration in service revenue growth over the last two years on structural legacy revenue weakness and acute data substitution.

¨ IND Telcos remain the most fundamentally attractive. IND Telcos are not regarded as yield stocks (the focus has been more on earnings delivery) and should be insensitive to external/macroeconomic risks/developments, in our view. The sector remains our sole OVERWEIGHT among the ASEAN-4 (we remain NEUTRAL on Malaysia and Singapore, and UNDERWEIGHT on Thailand). This is driven by the industry’s superior growth prospects, the largely benign market competition and undemanding valuations. Telkom Indonesia remains our IND Telcos Top Pick. (Jeffrey Tan)

(Bloomberg) -- Buying consumer stocks and avoiding bankshas proved a winning formula for the manager of Indonesia’s top-performing share fund. To maintain returns, PT Samuel AsetManajemen is focusing on companies that are benefiting from arise in spending by lower-income people.PT Indofood CBP Sukses Makmur ($ICBP), an instant noodle-maker, PTGudang Garam ($GGRM), a tobacco company, and PT Telekomunikasi Indonesia ($TLKM)are among Samuel’s top picks, President Director Agus Yanuarsaid in an interview in his office in Jakarta. They arebenefiting from an increase in consumer spending driven byrising raw-material prices and policies to help poorer people,he said.“The rebound in commodity prices has helped lower-incomeconsumers,” said Yanuar. “That, combined with the decision tolift the threshold for non-taxable income and the variousgovernment assistance for education and health care, has boostedspending.”Indonesia’s key raw-material exports including coal, tinand palm oil have rallied this year, providing more work incommodity-dependent areas like Sumatra and Kalimantan and havinga flow-on effect to local businesses. A sevenfold jump in theamount earmarked for social security programs in this year’sbudget and a 50 percent increase in the level of incomeIndonesians don’t have to pay tax on is also putting more moneyin wallets.Samuel Aset’s SAM Indonesian Equity Fund has returned 15percent so far this year, beating all peers with assets of morethan 1 trillion rupiah ($75 million) and tripling the JakartaComposite Index’s 4.8 percent advance, according to datacompiled by Bloomberg.Southeast Asia’s largest economy grew at the slowest pacesince 2009 last year and President Joko Widodo is attempting tospur growth via infrastructure spending, pressuring banks tolower lending rates and a planned tax amnesty, which the centralbank estimates could lure about 560 trillion rupiah ofundeclared income from overseas.Samuel went underweight Indonesian banks after theFinancial Services Authority said in February that it would capdeposit rates and force lenders to make similar reductions totheir loan rates, said Yanuar, who helps manage the SAMIndonesian fund. The Jakarta Finance Index is the worstperformer among nine industry measures on the JCI this year,declining 2.8 percent.The Jakarta Consumer Goods Index has risen 11.4 percent in2016. Indofood is up 24 percent, Gudang Garam has rallied 15percent and Telkom has advanced 25 percent.

- Higher oil price will reduce fiscal deficit — The Indonesian government now expects incremental revenue from the recent bounce in oil price to ~US$50/bbl. Despite Indonesia is a net importer of oil & gas, fiscal deficit could decline by Rp0.1- 0.9trn based on government’s calculation for every US$1/bbl of oil price increase. The government is currently using an oil price of US$35/bbl in their 2016 proposed budget and thus with higher oil prices, they should receive additional revenue from the oil & gas sector.

- Gasoline being sold at c.US$50/bbl equivalent after taking into account the distribution margins of Pertamina — The current price of gasoline at Rp6,550/litre translates to c.US$48-50/bbl of oil prices. Thus the government is already at a comfortable level in terms of the selling prices of gasoline, and should see no pressure to increase the prices unless the oil prices were to increase to a higher level, say US$55-60/bbl. At Rp6,550/litre, Pertamina is making a distribution margin of Rp1,010/litre, as per government calculations (see Fig 1 for government’s detailed calculation of fuel prices).

- Non-subsidized fuel (RON97) in Malaysia is cheaper vs that in Indonesia — RON95 gasoline price in Indonesia (Rp8,250/litre) is +22% higher than RON97 price in Malaysia (Rp6,715/litre). The RON97 in Malaysia is a non-subsidize fuel while the RON95 is still being subsidized and sold at Rp5,575/litre.

- Tax amnesty is still on schedule to be passed in June 2016 — We see such an outcome as not being priced in by the market (see our recent Indonesian strategy note - Still Positive: Spotlight on Five Key Issues for Market). The parliament head of commission XI, Ahmadi Noor Supi, mentioned that tax amnesty bill will not get delayed since it is a critical part of the government’s 2016 budget revision. As per the government, they have included proceeds amounting to ~Rp103trn (US$7-8bn) from the tax amnesty bill in the 2016 revised budget.

- Maintain our positive view on the market — At a 1-year forward PER of 15.1x, the JCI is not cheap but nor does it look overly expensive, and we maintain our 5,700 target (+16%) set last October. Sector-wise, we continue to like property, construction and infra. $ASII rejoins our top picks and we see more value in banks as gainers from the expected passage of a tax amnesty bill. Top picks: $BBNI, $BBTN, $LPPF, $TLKM, $ASII, $MIKA, $PTPP, $ADHI, $BSDE, $CTRA, $PWON and $JSMR.

This report documents 4G developments across the ASEAN-4 telcos and complements RHB’s coverage initiation on the world’s largest mobile telecommunications group, CM. 4G has gained considerable traction across developing markets due to rapid network expansion and the use of optimal spectrum bands. Falling prices of 4G handsets are also driving a raft of upgrades to the spectrally-efficient technology. We expect 4G to be near ubiquitous across the ASEAN-4 by 2018/2019, helped by data-centric applications and the progressive adoption of the 700MHz band.

¨ 4G is increasingly mainstream. 494 LTE networks have been launched in 162 countries as at April, with over half of live deployments in developing markets, according to Global Mobile Suppliers Association (GSA) data. Across the ASEAN-4, 4G was first commercialised in Singapore (2012), followed by Malaysia/Thailand (2013) and Indonesia (2014). The rapid 4G footprint expansion in the Asia-Pacific region has helped drive strong subscriber (sub) conversion from 3G, with the decline in price-points of handsets further easing barriers to switching. We expect 4G penetration in the ASEAN-4/China markets to respectively reach 60-70%/83% by 2018 from 15%/33% currently.

¨ China’s 4G coverage is already above 90%. China Mobile’s (CM) (HK:0941) pervasive 4G coverage in China puts it in an enviable position to drive stronger data uptake and ARPU uplifts going forward, in our view. Its 4G sub penetration surged to 37.8% in 2015 (2014: 11.2%) post aggressive 2014/2015 4G capex. We project its data traffic to grow by a FY15-18 CAGR of 54.1% while blended ARPU is set to rise to CNY66.00 in FY18 (FY15: CNY57.70). While average data consumption in China still lags the ASEAN-4, the gap should narrow quickly, given the proliferation of over-the-top (OTT) applications and the Chinese penchant for online services and social media.

¨ Improved data economics from overstated regulatory risks. Unlike few ASEAN-4 markets where spectrum is typically auctioned off or awarded via a beauty contest, Chinese telcos are beneficiaries of near free spectrum allocated by the Ministry of Industry and Information Technology (MIIT). This eliminates the risk of hefty amortisation charges from prohibitive spectrum costs, which may dis-incentivise network investments. Regulatory risks, in our view, are overstated in China, as some polices do offer long-term mutual benefits.

· TLKM’s engine growth is mainly coming from cellular business with growth of 18% YoY especially from data of 40% due to high traffic for smartphone registration

· Indihome also remains as company’s backbone with the trend of increasing price. Compared to its competitor, Linknet that still use hybrid cables, Indihome’s has used fiber and the speed is faster. TLKM targets the additional 1.1-1.2bn subscribers of Indihome by the end of thus year. 80% of subscribers take standard package of around Rp400k per month which coming from previous discounts and promotions. Some bottleneck for Indihome business is the lacking of fiber recourses and technical as the they are also acting as sales person, selling Indihome products door to door. TLKM aims to improve RPU by having advertisement and new stream, tapping cooperation with OTT players. TLKM’s vision is to buy bulked and enrich the contents for Indihome

· Capex’s plan is at 25% sales with allocation 60% for mobile, 5-10% for other business, and remaining for Indihome

· Competitive advantage is being a triple players (phone, internet, and television)

· Currently still focus on strategy to migrate existing speedy users to Indihome and improve 4G users with bonus quota program for Ramadan plan

· 1 day in Telkom is roughly equal with revenue or Rp230bn

· Commentary for competitors of EXCL and ISAT who just made a JV, is a good to open up opportunities. TLKM states just watch and see whether the JV works

· TLKM admits they need more spectrum holdings and expects to have more spectrum in tender 1H16. TLKM’s spectrum is as much as EXCL although TLKM’s market share is four times bigger

· TLKM has no plan for M&A in near future

· TLKM states that the current trend is bonus quota for 4G and will persist with separate data packages

· Regarding employees, TLKM said more early retirement (ERP) coming in 3Q16 with budget of Rp500bn coming from HR guidelines until retirement in 2018. There are 20k staffs retired between 2017-2019 (normal retirement). Meanwhile, the new recruitment is decreasing due to difficulty in finding candidates with digital skills sets

· Main concern for TLKM now is at competition for 4G and regulation for spectrum sharing and connection. TLKM also waits for any price intervention by govt

More growth exposure from mobile and fixed data serviceWe increase Telkomsel’s 2016E revenue by 2% vs. old estimate, mainly on the back of higher data revenue by 3% (driven by traffic). Regarding fixed broadband, we expect Indihome to contribute 5-6% to TLKM’s revenue in 2016E-17E (vs. 1Q16 4%) assuming same ARPU level as 1Q16 at IDR326K. Currently, Indihome lowest packet price of IDR 405K (since Feb 2016; rose 16% from prev. IDR350K) is already similar to LINK’s 1Q16 ARPU of IDR402K. Our 2016E revenue is 3% above our old estimate. Slight change in EBITDAWe revised up our 2016E-18E EBITDA by 3-5%, mainly due to higher revenue estimate and slight margin increase on the back of better 1Q16 EBITDA margin (no ERP) than our prev. estimate for 1Q16. Our 2016E ERP cost estimate is IDR500bn (possibly incurred in the remaining quarters this year). We also take into account that TLKM might expense est. IDR750bn final tax as expense in 2016 (already paid as cash but still booked in prepaid tax last year).

More capex to support data growthWe increase our 2016E-18E capex to sales assumption from 26-19% to 26-23% anticipating investment increase to support data growth. Our 2017E-18E capex is higher by 23/17% to old estimate.

Post 1Q16 – which coincided with a dengue fever outbreak – Mitra Keluarga still expects healthy patient traffic in April, especially for its hospitals in the Jakarta region. It is receiving more corporate patients from the likes of PT Telekomunikasi Indonesia ($TLKM) and Perusahaan Listrik Negara. Its Tegal hospital in central Java, which serves BPJS (Indonesian universal healthcare) patients, is also seeing a pick-up in private patients. Thus, we keep our BUY call and DCF-based TP of IDR3,100 (19% upside).

Indonesia: 12th stimulus policy – Further Streamlining in Various Permits

The government released the details of its 12th stimulus policy, which mostly aim to further simplify various permits in doing business. While the latest policy appears to be an accentuation of previous stimulus to streamlines business process, in our view the government continues to show its focus to attract more investment into domestic economy, especially given sizeable contribution from Gross Fixed Capital Formation (GFCF) to overall Indonesia’s economy.

Efforts to lure more investmentPresident Joko Widodo through several cabinet meetings has emphasized his means to increase the rating of the country’s Ease of Doing Business (EODB) to the 40th rank. The World Bank surveyed that Indonesia stood at rank 109th from a total of 189 surveyed countries. Other ASEAN countries such as Singapore and Malaysia stand at the 1st and 18th rank of the list. Currently, there are 10 indicators that measure the EODB rank for a country. The indicators are business starting process, construction permit dealing process, tax payment, credit accessibility, contract enforcement, electricity supply, across border trading, insolvency settlement, and minority investors protection. To comply with the indicators, the Indonesian Economic Ministry along with the Investment Coordinating Board formed deregulations through the 12th Economic Stimulus.

Key points of the 12th stimulus policyThe 12th stimulus introduced a new deregulation scheme that will cut 94 procedures into only 49 procedures and 9 permits to only 6 permits. Furthermore, the stimulus package is followed by the release of 16 new regulations.¨ For the business starting process, the initial regulation requires investors to go through 13 procedures that will take 47 days and IDR6.8m-7.8m to obtain Business Permit (SIUP), Company Registration (TDP), Deed of Establishment, location permit, and nuisance permit. With the deregulation, investors will only need 7-10 days procedure with IDR2.7m fee. Moreover, the government will only require 3 permits for micro, small and medium enterprises (MSME), which are SIUP, TDP, and deed of establishment.¨ The government also released a new regulation through regulation no 7/2016 on changes in authorised capital for limited company. With the new regulation, MSME’s authorised capital will be determined by mutual agreement of the founders as outlined in the deed of establishment. However, the regulation will keep enacting the minimum requirement of IDR50m for limited company.¨ As for building construction permit, the government will cut the process into 14 procedures within 52 days from initial of 17 procedures and 210 days of processing time. Moreover, the building construction permit fee will be reduced to IDR70m from the initial fee of IDR86m.¨ Tax payment process will be cut into 10x payments with online system from an initial of 54x payments. While property registration will be cut into 3 procedures in 7 days with a fee of 8.3% from the value of property. The government previously imposed 5 procedures with 25 processing days and 10.8% fee for the property registration.¨ The government also decreases the simple lawsuit settlement process to only 8 procedures in 28 days. Any disagreement on the verdict will be able to appeal with additional 3 procedures and maximum of 10 days of settlement.Follow-up measure to reduce overall execution riskBefore the release of the 12th stimulus package, the government has released a total of 195 regulations from September 2015- April 2016. The government stated that as of 18 April, it has successfully completed 169 regulations or 87% from the total regulation released. There are 16 (8%) regulations that are still in the discussion process, while the remaining 10 regulations that will be taken out from the Economic Stimulus Package. The government stated that each packages received positive responses from investors and citizens. However, the government will increase its socialisation and evaluate the implementation through dissemination and business clinics. The business clinics aimed to further discuss the stimulus packages with stakeholders to ensure the on the ground efficiency of the packages. Moreover, the business clinic will also serve as the communication facility between investors and government to resolve any problems, including the export increment issues. The clinics and dissemination will be implemented in 3 regions, such as Palembang, Balikpapan, and Lombok.

The near term catalyst is the tax amnesty approvalWe continue to believe that tax amnesty approval could serve as one of major catalyst in the near term. Post the Parliament’s recess session, the long-awaited tax amnesty bill is finally being discussed under the Commission XI, which has been holding hearing sessions with experts, business leaders and other stakeholders. Given its importance on the overall budget and the progress of infrastructure development, the Government is mulling over the fact that the bill could take effect in June. We believe the initial approval of the tax amnesty could be an important catalyst for the near term, as well as a major step taken in the right direction to finally foster the compliance of taxpayers – which could help solidify the Government’s overall budget composition going forward. As such, we expect further foreign fund inflows to support the market post the approval of the tax amnesty although we acknowledge that execution risks still remain at this juncture. Our top pick in the market are $BBCA, $BBTN, $ICBP, $INDF, $ADHI, $LPPF, $MIKA, $TLKM, $BSDE and $LSIP.

Downgrade to Hold on share price spike post 1Q16 earnings announcement. We downgrade TLKM to a HOLD with an unchanged DCF-based target price of Rp3,800. We think TLKM’s solid performance as seen in 1Q16 (in-line) is well priced in, leaving only less than 5% potential upside to our target price, following its share price rally on the back of strong 1Q16 earnings expectation.

1Q16 performance largely in-line. EBITDA reached Rp14.7tr (+18.5% y-o-y, +2.2% q-o-q, EBITDA margin: 53.2%), slightly above our estimate and in line with consensus. NPAT reached Rp4.5tr (+20.2% y-o-y, +16.3% q-o-q), in line with our estimate but above consensus on stable financing cost. We expect is EBITDA margin to decline slightly on continuous broadband infrastructure development for both its mobile and fixed-line businesses, in line with guidance.

Valuation:We downgrade TLKM to a HOLD with an unchanged target price of Rp3,800 (adjusted FY16 EV/EBITDA 7.7x), which is derived using the discounted cash flow (DCF) model with 9.4% weighted average cost of capital (WACC) and 1.0% terminal growth.

Key Risks to Our View:Disruption to benign competition. If any player becomes aggressive in gaining market share and triggers a new wave of price war, the whole sector could suffer.

SEA equity markets added on to gains in March with improving foreign inflows, as risk appetite improved following some stabilization in China and a weaker USD from delayed Fed hike rate expectations. With a dovish Fed and likely tightening only in June, investor concerns on the global economic recovery are expected to ease further near term, which will be supportive of risk assets.

Within the region, we view Indonesia and Philippines as offering relatively stronger structural growth stories. Apart from infrastructure plays such as Jasa Marga ($JSMR), sectors we favour in Indonesia include the property sector where we see potential catalysts from improving presales helped by a lower interest rates environment and progress in the government’s tax amnesty programme. We highlight Bumi Serpong ($BSDE), which is well positioned to benefit from a recovery in property demand while valuations remain undemanding. We also favour market leader Telekomunikasi Indonesia ($TLKM) following more rational competition in the telecommunications sector. With a stable earnings outlook driven by continued growth in voice and data revenues, we view TLKM as a core holding within the SEA telecommunications sector.

Incoming data releases from the Philippines indicate that domestic demand trends remain on a positive track in 1Q16. January’s remittances growth was also broadly in line with trend, growing 3.4% yoy (vs 2015’s 4.1% growth). The next key event domestically is the upcoming elections in May where we expect election rhetoric to cast some uncertainties in the equity market. Post elections, we expect the gradual reform pace to be maintained and highlight Ayala Corp as one of our preferred large cap picks to accumulate on weakness, which offers a portfolio of stable and growth companies leading in their respective sectors and well positioned to benefit from the country’s economic growth

¨ IndiHome constrained by lack of installation teams. The growth of Telkom Indonesia’s (Telkom) triple play bundled fibre service has been hampered by the lack of installers (1.1m subscribers (subs) of 10m premises passed for fibre at end-Dec 2015). This suggests that demand for its new bundled offering is likely to be capped in the medium term until the company mobilises new installers. Telkom is targeting 10,000 installers by year-end from 4,800 currently. We draw parallels with Telekom Malaysia’s (TM) (T MK, NEUTRAL, TP: MYR6.40) fibre broadband rollout, which encountered similar bottlenecks in the past. Telkom is vying for 3m fibre-to-the-home (FTTH) subs by end-2016 (30% take-up). The ARPU uplift from IndiHome is 2-3x that of regular fixed line ARPU.

¨ Dividend. Telkom expects FY15 payout to be sustained at FY14’s 60% level or higher, consistent with its broader payout policy of 50-70%. Assuming a constant payout, its dividend yield translates into 3%, ie still the highest among domestic peers. We expect future dividend payouts to be supported by the steady growth in Telkom’s FCF, with FCF yields projected at 6-7% for FY16-17.

¨ One-offs and forecast. The additional one-offs booked during 4Q15 comprised additional staff incentives at Telkomsel totalling IDR190bn and universal service obligation (USO) cost adjustments of IDR283bn. Telkom expects: i) revenue growth to be in line or higher than the market, ii) a slight decline in EBITDA margins, and iii) capex/sales of 22-25% for FY16. 60% of the overall capex is allocated for Telkomsel, with the remainder for the fixed broadband expansion. Our FY16-17 core earnings forecasts are trimmed by 5%/7% respectively after a few house-keeping adjustments, and we introduce FY18 numbers. Key downside risks to earnings are stronger-than-expected competition and higher-than-expected capex.

¨ Still our top Indo telco pick. Our DCF-based TP is raised to IDR4,000 (implying 6.5x FY17F EV/EBITDA) after rolling forward our valuations and adjusting for the latest net debt position. Telkom trades at inexpensive 5.7x FY17F EV/EBITDA. This is at a discount to its regional peers’ 9-10x, with valuations backed by its strong balance sheet and superior ROE/dividend yields. The stock remains one of our preferred ASEAN-4 telco exposures.

Revise up EBITDA forecast in FY16/17. We revise up o Revise up EBITDA forecast in FY16/17. ur FY16 and FY17 EBITDA forecasts by 11% to Rp53tn and Rp55tn, respectively, on better overall top-line growth and relatively stable profitability. Our new revenue forecasts are 13% and 14% higher than the previous forecasts on a better outlook for the data segments (under Telkomsel), driven by stable data pricing and better subscribers growth.

4Q15 results reflect Telkomsel’s 4Q15 results reflect Telkomsel’ssupremacy in Indonesia supremacy in Indonesia cellular segments. We are more confident about TLKM cellular segments earnings outlook, as we believe Telkomsel will continue benefit from a more stable industry that was reflected in its 4Q15 performance. TLKM booked Rp14.3tn (+16% y-o-y, +6% q-oq) EBITDA in 4Q15, beating our expectation but in line with consensus. 4Q15 EBITDA margin hit 53.6%, the highest level in 2015.

Spectrum developments dotted the Asean-4 telco landscape in recent weeks. Concerns over a competitive spectrum auction spooked MY investors just as the TH telcos prepare for the first tranche of spectrum payouts. We downgraded TH sector to UNDERWEIGHT on earnings concerns and intensifying competition. The MY telcos were earlier downgraded on auction fears albeit the about-turn in policy (spectrum assignment vs auction) prompted us to restore our NEUTRAL stance. The INDO telco sector remains the sole OVERWEIGHT of the Asean-4 telcos.

¨ ASEAN-4 telcos down 2.5% YTD. The strongest declines were see in MY (-11.6%) and SG (-5.2%) while both INDO and TH telcos gained 6-9%.

¨ Lost in translation. The announcement of a spectrum bidding exercise during the tabling of the revised Budget 2016 on 28 Jan clearly spooked investors. It was only a month earlier that the Thai Government raised a whopping USD6.5bn (MYR28bn) from an auction of the 900MHz band. A competitive bidding (a first for Malaysia) would have been value destructive for the sector. On 1 Feb, the Government announced that the 900/1800MHz spectrum would be re-allocated to Maxis, DiGi.Com (Digi), Celcom and U-Mobile under a new spectrum framework (kindly refer to our report dated 3 Feb – Telecommunications : A Fuzzy Line Restored). While the ‘awards’ ruled-out a cataclysmic auction, the ‘change of heart’ costs the telcos some MYR14bn in market capitalisation. Expect further details on the spectrum fees in the coming months. The remaining 5MHz on the 900MHz is likely reserved for the high speed rail (HSR).

¨ Singapore confirms a fourth mobile entrant. The Infocomm Development Authority (IDA) has set aside 60MHz for a new operator in a two-stage spectrum auction scheduled for 3Q16. This follows the announcement of the revised spectrum framework on 18 Feb (kindly refer to our report dated 19 Feb – Firing The Fourth Cylinder)

¨ Results season well underway – shaping up to be another lacklustre quarter. INDO telcos are seen to continue outperforming with the last of the results due late March. 4Q15 earnings season has ended for the SG telcos. Key takeaways were: i) the continuing sluggish mobile revenue from weak usage/roaming revenues, and ii) ARPU pressure from a stronger take-up of SIM-only plans. While the usual seasonality in subscriber acquisition cost (SAC) pummelled 4Q15 EBITDA, the impact was particularly acute for StarHub due to additional provisions and costs. It was also another lacklustre quarter for the Malaysian and Thai mobile operators due to weak consumer sentiment and heightened competition, with the TH telcos ramping-up handset subsidies to drive 3G/4G upgrades ahead of the spectrum transfers. The bright spot continues to be in Indonesia where a steady competitive environment and rapid mobile data take-up have hitherto driven the superior mobile revenue growth.

Telkomsel targets its revenue to reach Rp84tn (US$6bn) in 2016, +10.5% YoY. Telkomsel Director of Sales, Mas’ud Khamid said that revenue in 2015 reached Rp76tn (US$5.4bn),+14.6% YoY. In 2016, Khamid explained that the company plans to boost data, which the company aims to contribute 40% of Telkomsel’s revenue guidance. Additionally, the company also will partner up with motorcycle taxi, Go-Jek apps to promote sales. Under a partnership agreement, Telkomsel will launch a new product called “Go-Pulsa” to enable Go-Jek drivers to sell phone credit vouchers valued between Rp50k (US$3.7) and Rp100k (US$7.4).

Telkomsel targets its revenue to reach Rp84tn (US$6bn) in 2016, +10.5% YoY. Telkomsel Director of Sales, Mas’ud Khamid said that revenue in 2015 reached Rp76tn (US$5.4bn),+14.6% YoY. In 2016, Khamid explained that the company plans to boost data, which the company aims to contribute 40% of Telkomsel’s revenue guidance. Additionally, the company also will partner up with motorcycle taxi, Go-Jek apps to promote sales. Under a partnership agreement, Telkomsel will launch a new product called “Go-Pulsa” to enable Go-Jek drivers to sell phone credit vouchers valued between Rp50k (US$3.7) and Rp100k (US$7.4).

Telkomsel targets its revenue to reach Rp84tn (US$6bn) in 2016, +10.5% YoY.Telkomsel Director of Sales, Mas’ud Khamid said that revenue in 2015 reached Rp76tn (US$5.4bn),+14.6% YoY. In 2016, Khamid explained that the company plans to boost data, which the company aims to contribute 40% of Telkomsel’s revenue guidance. Additionally, the company also will partner up with motorcycle taxi, Go-Jek apps to promote sales. Under a partnership agreement, Telkomsel will launch a new product called “Go-Pulsa” to enable Go-Jek drivers to sell phone credit vouchers valued between Rp50k (US$3.7) and Rp100k (US$7.4).

Indo Strategy - Positioning amidst slowest growth in a decade
Too early to bottom fish
The market sharp sell-down may appear excessive, yet we think it may be too early to be an aggressive buyer. The outlook of subdued growth outlook, probably a bit slower, broader and longer lasting than most envisaged, suggests it is still better to seek out stocks with relative earnings visibility. Indeed there is little indication to suggest this slowdown has stabilized thus far.
Broad based slowdown
Growth that was designed to slowdown in order to rein in CAD, e.g. BI allowing Rp to weaken for an essentially dollarized economy, has proven to be very potent. Weaker commodity prices along with the transition easing from the recent investment surge may well have contributed as well. Indeed, the recent earnings trend suggests a more pronounced and broad-based slowdown. This ranges from large ticket items to even basic consumer staples. Bellwether FMCGs that have already reported are showing that top-line growth running at a decade low pace (ex-GFC period); a reflection of weaker buying power and rising competition. Equally, we have also noticed an uptick in NPL though more toward the SME and micro segments. In addition, our channel checks across various industries, including bellwether consumer packaging, mostly reported a deteriorating environment.
Slower and longer?
Contrary to general expectations, we think it is premature to assume an economic recovery in 2H15. Indeed sub-5% growth for the year cannot be ruled out. Recently the capex trend suggests easing post the initial surge 3-4 years ago. That along with the job creation trend, easily half the pace seen in the past couple of years, is not supportive of any fast economic recovery in the second half. While we remain upbeat that the govt. infrastructure spending will be punchier into 2H, we think the direct economic impact would be muted. Indeed the more powerful multiplier effect will only be visible in the medium term. Indeed there is little indication to suggest this slowdown has already stabilized. As such, we believe stock picking toward earnings visibility and predictability will be key in this 'new normal'.
Macro improving vs Micro worsening - Market context
In balance, we think the market downside risk is limited; yet we think it may be too early to be an aggressive buyer. We think the macro environment is turning more positive, e.g. CAD possibly below BI's guidance of 1.6% in 1Q, along with easing inflation, etc. Politics too, seems to have stabilized, which should pave the way for the govt. to kick-start major infrastructure projects. Yet, faced with the possibly of the slowest growth in a decade (ex-GFC), along with flow favoring North Asia, we think stock picking towards better earnings visibility matters, notwithstanding the fact that initial sell-down tends to be indiscriminate. Within our DB Portfolio stocks, we think the following have high earnings visibility: BBCA and BBNI (Banks), TLKM (Telco), ICBP and KLBF (Consumer). Conversely, stocks that have done well in spite of worsening earnings fundamental such as ASII and UNTR appear more exposed.
$IHSG